Welcome back to Energy Source. Oil prices have been on a tear of late. Brent crude closed up yesterday at $88.19 and has risen 13 per cent since January 4. Many investors had exited the oil trade in recent months as fears of an economic recession gripped the market. But renewed optimism over global growth and China’s reopening have led to traders piling back into crude. The influx of cash, and signs of strong demand, are pushing prices higher and the rally could still have some room to run.
Today’s newsletter focuses on the brouhaha between the US and Europe over green subsidies. It’s time for Europe to step up with its own version of the IRA. In Data Drill, Amanda breaks down what the global battery market is on pace to look like in 2035. Can the US dislodge China at the top?
Thanks for reading. — Justin
Europe should learn to love green subsidies
After the anger, bargaining and depression, Europe’s journey with US’s landmark climate legislation looks to be slowly moving to its inevitable end point: acceptance that Europe is going to have to start throwing more cash at its clean energy sector if it wants keep up with the Americans.
Ursula von der Leyen, the European Commission president, promised energy bosses at Davos last week that the EU would ease rules on state clean energy subsidies and speed up permitting for new green projects, acknowledging the need to keep up with green incentives in the US’s Inflation Reduction Act.
For months, the US and Europe have sparred over America’s new climate law, which promises hundreds of billions of dollars in green subsidies and is shot through with “made in America” provisions that aim to spur the construction of new green supply chains in the US. Europeans are worried that president Joe Biden’s climate law will gut its green energy sector, seen by leaders as vital to the bloc’s economic growth, by luring companies and investment across the Atlantic.
The law was developed to tackle climate change while also combating China’s dominance over large swaths of the clean energy market, won in large part through generous state backing. But Europe fears it will be collateral damage.
Fresh reporting from Derek and Amanda shows the fear is justified. Local economic development officials from US rustbelt states such as Ohio and Michigan are looking to revive their manufacturing sectors and fast-growing sunbelt states such as Arizona are fanning out across Europe armed with the IRA’s green incentives and trying to lure European clean energy developers stateside.
They are getting a warm reception. Gunter Erfurt, chief executive of Meyer Burger, a Swiss solar manufacturer, said that “if the EU does not come up with something similar [to the IRA] . . . then we may continue growing outside [Europe], in the US in particular.” Tom Jensen, chief executive of Freyr, a Norwegian battery producer that committed to building a new plant in the US after the IRA passed, said the EU “should think about replicating the [IRA]”.
It won’t be easy for Europe to pull off. The continent’s clean energy policy has historically leaned on green energy mandates and regulations to encourage investment and development — the sticks of policymaking. There is not a consensus, yet, among member states to shift to subsidies — the carrot approach adopted by the US Congress.
The biggest hang-up is that smaller European countries worry that richer EU nations will use their financial heft to lure away green businesses in much the same way the US is doing. Easing state subsidy rules as von der Leyen has indicated could lead nations such as Germany and France to shower cash on their clean energy sectors to prevent companies from decamping to the US’s greener pastures. There’s no guarantee smaller nations will be able to keep up.
But European leaders should do whatever they can to find the cash for their own EU-wide version of the IRA. The pay off for western economies and the climate would be worth it.
Analysts at Goldman Sachs, who think the fear aroused by the IRA will finally spur Europe to develop their own version of the law, have offered up some useful suggestions for what it might look like:
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They argue that the EU should focus US-style incentives on cleantech sectors, such as carbon capture and storage and green hydrogen, that are currently not profitable but could be made so with targeted subsidies.
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Goldman says the EU should also match the US with its own “Made in Europe” green provisions that would encourage supply chains to be built on the continent.
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Finally, they argue the EU should slash the time it takes to approve green projects to a year or so — red tape that can hold up energy projects for years has been a key focal point for developers on both sides of the Atlantic.
All of this, they argue, could supercharge the REPowerEU plan — a set of ambitious green targets rolled out last year as part of Europe’s effort to free itself from Russia’s energy grip. The plan, however, is now widely seen as toothless without the incentives to spur the huge investments needed to hit the targets.
Rather than inflaming a green trade war with the US, Goldman argued it would spur a transatlantic investment boom, generating €4tn in clean energy investment in Europe and driving a “race to the top” on climate with the US.
European leaders have spent years rightly haranguing the US to do more on clean energy and climate change. It can’t turn around now and criticise it for doing too much. (Justin Jacobs and Amanda Chu)
Data Drill
The scramble to cash in on the energy transition and build up domestic supply chains has sparked a surge in battery projects worldwide.
More than 360 battery plants are in the pipeline through 2031, a 40 per cent upward revision from last year’s forecast, according to Benchmark Mineral Intelligence. The company has tracked more than $150bn in investments in the sector to date.
Malaysia had the largest growth rate last year, more than tripling its forecasted capacity for 2031. Production forecasts for the US increased 42 per cent year over year, with 1 terawatt hour of capacity expected in 2031.
The surge in planned gigafactories will require large supplies of raw materials, which are already facing supply constraints and steep price increases. BMI expects battery demand for lithium and nickel to more than double in the next decade.
“It’s going to be a real challenge for the mining industry or the extraction industry to keep up with the scale of demand that we’re expecting,” said Caspar Rawles, chief data officer at Benchmark Mineral Intelligence.
Despite growth in battery capacity worldwide, China is expected to maintain its majority market share, making up roughly two-thirds of battery cell production capacity in 2035, down from 78 per cent in 2022, according to Benchmark Mineral Intelligence.
Power Points
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EU sanctions on refined fuel imports from Russia could spell fresh turmoil for global oil markets.
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Britain must devise its own green strategy to counter the US and EU “subsidy arms race”, said CBI chief.
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The Netherlands wants to close Europe’s largest gasfield this year citing its dangerous, earthquake-prone operations.
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Multibillion-dollar renewable energy projects aren’t getting built because of supply chain issues and a challenging regulatory environment. (WSJ)
